The Causality between Financial Inclusion and Inclusive Growth: Evidence from A Newly Constructed Index in Egypt

Financial inclusion is one of the key enablers of driving economic growth, alleviating poverty, and consequently achieving inclusive growth. Although the relationship between financial inclusion and economic growth has been widely investigated, its relationship with inclusive growth remains unexplored. This paper examines the causality between financial inclusion and inclusive growth in Egypt during the period 2004-2022. The novelty of this study resides in constructing two composite indices using a Principal Components Analysis (PCA). The first composite index is for financial inclusion, while the second is a new multidimensional index for inclusive growth. The results reveal that the Inclusive Growth Index experiences an upward trend over the study period while the Financial Inclusion Index starts to increase in 2018. The results of the Toda-Yamamoto Causality Test show a bidirectional causality between financial inclusion and three of the sub-indices of inclusive growth as well as the overall inclusive growth index. The empirical evidence highlights that financial inclusion efforts will not achieve their targeted outcome unless a simultaneous inclusive growth strategy is conducted. Moreover, improving governance indicators is crucial to promoting inclusive growth.